When a farm is sold as a going concern, it is fairly common for
the family home to be situated on the same parcel of land and also
form part of the sale transaction. An important consideration
in these circumstances involves the allocation of proceeds between
the farming assets and principal residence of the taxpayer.
Absent this determination, the gain ultimately attributed to the
residence may be subject to income tax or at the least utilize a
portion of any available capital gains exemption (capped at
$800,000 / individual) should the property be "qualified farm
To calculate the gain attributed to the farmer's residence,
the Income Tax Act ("Act") generally provides two
options. The first involves a "reasonable"
allocation of proceeds and costs between the family home and
remaining assets. If specific and identifiable costs are
available, this may prove most accurate to establish a cost base
for the family home. A review of recent sales data in
connection with similar residential properties or an opinion of
value from a knowledgeable real estate agent / broker should be
sufficient to determine the proceeds of
disposition allocatable to the residence.
The second option, by election, is accomplished by first
calculating the gain on the entire transaction (i.e. the gain from
the disposition of the land used in the farming business plus the
gain on the principal residence portion). From here the Act
allows a deduction of $1,000 plus $1,000 for each year after the
later of December 31, 1971 or the date the residence was acquired
and designated as the taxpayer's principal residence. The
election should be filed by attaching a letter to the personal tax
return of the individual detailing the following:
that he is making the election;
the number of taxation years ending after the acquisition date,
which the property was his principal residence and during which he
was a resident in Canada; and
a description of the property sufficient to identify it with the
property designated as his principal residence.
The decision regarding which option to select is primarily fact
driven, and it would be prudent to calculate the taxable gains
under both scenarios if the appropriate information is
Other important items to consider, which are beyond the scope of
this article include any GST / HST implications and a determination
of land / acreage that can be allocated to the principal
If it is desirable for the business related farmland and the
principal residence to be gifted to a child, it is important the
transaction be structured accordingly to take advantage of the
exemption. Absent any planning, the assets (assuming they
meet the requisite tests pursuant to subsection 73(3) of the Act)
would likely still flow to the child on a tax free basis.
However, this may result in an unexpected tax liability if
ultimately sold by the child as he / she would inherit the
historical cost base of the properties. One alternative would
be for the transfer to be split into two separate transactions
– one related to the residence and the other the business
assets. This would allow the parents to trigger a FMV
disposition on the residence, which would be sheltered by the
exemption and further allow the child to inherit a higher initial
cost base. The remaining assets can be gifted pursuant to
subsection 73(3.1) without any imposition of tax.
There are a multitude of considerations when selling to a third
party or transferring the family farm to the next generation.
When a principal residence is involved, an additional element of
complexity arises; and without proper planning, unexpected and
oftentimes unnecessary tax may result.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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